Income Taxes

U.S Tax Reform Impact

On December 22, 2017, the U.S. Government enacted the reconciled tax reform bill, commonly known as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA makes broad changes to the U.S. tax code including, but not limited to, reducing the Company’s federal statutory tax rate from 35%, to an average rate of 29.4% for the fiscal year ended May 27, 2018, and then 21% for the year ended May 26, 2019 and thereafter; requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations' creating a global intangibles low-taxed income inclusion and the base erosion anti-abuse tax, a new minimum tax. The TCJA also enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property, however, the domestic manufacturing deduction, from which the Company has historically benefited, has been eliminated.

On December 22, 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) directing taxpayers to consider the impact of the Tax Legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Also, in March 2018, FASB issued Accounting Standards Update No. 2018-5, Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, ("ASU 2018-5") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company's accounting for the Tax Act was incomplete as of May 27, 2018. As of May 26, 2019, the Company’s analysis for the Transition Tax and the re-measurement of deferred taxes due to the Tax Rate Reduction was considered to be complete and the Company does not expect the analysis to change materially. Ongoing guidance and accounting interpretation for the Tax Act are expected over the coming months and years, the Company will consider any changes in the accounting of the Tax Act in the period of such additional guidance is issued.

The (benefit) provision for income taxes from continuing operations consisted of the following:



(in thousands)	Year Ended
	May 26, 2019			May 27, 2018			May 28, 2017
Current:
Federal	$	(67	)	$	(2,854	)	$	1,388
State	63			60			39
Foreign	83			83			82
Total	79			(2,711		)	1,509

Deferred:
Federal	1,581			(7,122		)	2,270
State	(142		)	470			261
Total	1,439			(6,652		)	2,531
Income tax (benefit) expense	$	1,518		$	(9,363	)	$	4,040

The effective tax rate for fiscal year 2019 changed from a benefit of 64% to expense of 71% in comparison to fiscal year 2018. The increase in the income tax expense for fiscal year 2019 was primarily due to the Company's acquisition of Yucatan and the change in valuation allowance related to the foreign deferred balances, the change in ending state deferred blended rate, the limitation of deductibility of executive compensation, and partially offset by the benefit of the foreign rate differential and the federal and state research and development credits, all primarily as a result of the TCJA.

The effective tax rate for fiscal year 2018 changed from an expense of 29% to a benefit of 64% in comparison to fiscal year 2017. The decrease in the income tax expense for fiscal year 2018 was primarily due to the TCJA such as the statutory rate change for federal and state, and one-time transition tax on the repatriation of foreign earnings.

The actual provision for income taxes from continuing operations differs from the statutory U.S. federal income tax rate as follows:



(in thousands)	Year Ended
	May 26, 2019			May 27, 2018			May 28, 2017
Tax at U.S. statutory rate (1)	$	764		$	4,784		$	4,922
State income taxes, net of federal benefit	46			439			307
Tax reform	—			(14,350		)	—
Change in valuation allowance	929			(176		)	85
Tax credit carryforwards	(771		)	(777		)	(834		)
Other compensation-related activity	618			566			(365		)
Domestic manufacturing deduction	—			—			(243		)
Other	(68		)	151			168
Income tax expense (benefit)	$	1,518		$	(9,363	)	$	4,040

(1) Statutory rate was 21.0% for fiscal year 2019, 29.4% for fiscal year 2018, and 35.0% for fiscal year 2017.

The effective tax rates for fiscal year 2019 differ from the blended statutory federal income tax rate of 21% as a result of several factors, including the Yucatan acquisition, the change in valuation allowance related to the foreign deferred balances, the foreign rate differential, the change in ending state deferred blended rate, the limitation of deductibility of executive compensation, and the benefit of federal and state research and development credits. The effective tax rates for fiscal year 2018 differ from the statutory federal blended income tax rate of 29.4% as a result of several factors, including change in ending federal and state deferred blended rate, one-time transition tax due to the repatriation of foreign earnings, the change in valuation allowance, limitation of deductibility of executive compensation, and the benefit of federal and state research and development credits. The effective tax rates for fiscal year 2017 differ from the statutory federal income tax rate of 35% as a result of several factors, including non-deductible stock-based compensation expense, disqualified dispositions of incentive stock options, excess equity compensation benefits from the adoption of ASU 2016-09, domestic manufacturing deduction, the benefit of federal and state research and development credits, the change in valuation allowance, all of which is partially offset by state taxes.

Significant components of deferred tax assets and liabilities reported in the accompanying consolidated balance sheets consisted of the following:



(in thousands)	Year Ended
	May 26, 2019			May 27, 2018
Deferred tax assets:
Accruals and reserves	$	3,130		$	1,421
Net operating loss carryforwards	9,385			1,955
Stock-based compensation	979			1,247
Research and AMT credit carryforwards	2,839			2,032
Other	461			427
Gross deferred tax assets	16,794			7,082
Valuation allowance	(4,116		)	(1,337		)
Net deferred tax assets	12,678			5,745

Deferred tax liabilities:
Depreciation and amortization	(14,324		)	(11,307		)
Goodwill and other indefinite life intangibles	(13,351		)	(8,201		)
Basis difference in investment in non-public company	(4,396		)	(3,722		)
Deferred tax liabilities	(32,071		)	(23,230		)

Net deferred tax liabilities	$	(19,393	)	$	(17,485	)

During the fiscal year ended May 26, 2019, and May 27, 2018, excess tax deficits related to stock-based compensation of $153,000 and $38,000, respectively, were reflected in the consolidated statements of income as a component of income tax expense as a result of the adoption of ASU 2016-09, specifically related to the prospective application of excess tax deficits and tax deficiencies related to stock-based compensation.

As of May 26, 2019, the Company had federal, foreign, California, Indiana, and other state net operating loss carryforwards of approximately $26.5 million, $9.9 million, $3.4 million, $5.8 million, and $6.3 million respectively. These losses expire in different periods through 2032, if not utilized. The Company acquired additional net operating losses through the acquisition of Yucatan Foods and GreenLine Holding Company. Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986 and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.

The Company has federal, California, and Minnesota research and development tax credit carryforwards of approximately $0.9 million, $1.8 million, and $1.0 million, respectively. The research and development tax credit carryforwards have an unlimited carryforward period for California purposes, 20 year carryforward for federal purposes, and 15 year carryforward for Minnesota purposes.

Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance of $4.1 million should be recorded as a result of uncertainty around the utilization of certain state and foreign net operating losses, and federal capital loss carryforward.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in thousands)	Year Ended
	May 26, 2019			May 27, 2018			May 28, 2017
Unrecognized tax benefits – beginning of the period	$	479		$	537		$	842
Gross increases – tax positions in prior period	29			21			11
Gross decreases – tax positions in prior period	—			—			(90		)
Gross increases – current-period tax positions	133			116			93
Settlements	—			(95		)	—
Lapse of statute of limitations	(25		)	(100		)	(319		)
Unrecognized tax benefits – end of the period	$	616		$	479		$	537

The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

As of May 26, 2019, the total amount of net unrecognized tax benefits is $0.6 million, of which, $0.5, if recognized, would change the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest is not material as of May 26, 2019. Additionally, the Company expects its unrecognized tax benefits to decrease by approximately $32,000 within the next 12 months.

Due to tax attribute carryforwards, the Company is subject to examination for tax years 2016 forward for U.S. tax purposes. The Company was also subject to examination in various state jurisdictions for tax years 2012 forward, none of which were individually material.